The FRC wants to clarify how RMCs account for expenditure from the service charge monies they hold for maintenance and other matters, such as repairs and gardening. Reflecting the legal position, a RMC’s financial statements would recognise this as service charge expenditure. At the same time, an equivalent amount of income would be recognised, representing drawings from the service charge monies received (i.e., a balancing figure). This means that to match the expenses it gives a net effect of nil, and shows the expenses are funded from the service charge receipts. These monies are held by the RMC in trust for the leaseholders, and cannot therefore be shown as an asset on the RMC’s balance sheet. The FRC proposes that the balance of the monies held is disclosed for information, along with the fact of its trust status.

While acknowledging that these proposals represent some progress by the FRC, ACCA is concerned that much more is needed to deliver authoritative guidance which fully meets the needs of leaseholders. The reporting envisaged by the FRC also has some, but not complete, common ground with the Summary of Costs, something that leaseholders can require under the Landlord and Tenant Act 1985. In consequence, there is potential for creating confusion.

Where, as is frequently the case, the leaseholders are the members of the RMC, their information needs are presently often satisfied by including all transactions and balances in the financial statements of the RMC. This methodology goes far beyond the FRC proposals by also recognising, for example, accrued expenses, service charge debtors and the balance of the sinking fund (reserves). As it satisfies the information needs of leaseholders, it is unlikely that a statutory Summary of Costs will also be required. However, this method of accounting is incorrect, particularly as the RMC is recognising assets and liabilities which are not its own.

A working group, which was devised by ACCA and other professional bodies, produced best practice guidance to encourage financial reporting by RMCs which is both appropriate, and attempts to meet the information needs of leaseholders. However, the guidance is not binding, tends not to be favoured by the leaseholders, and RMCs usually have no external stakeholder which could require them to adopt the correct method of financial reporting.

ACCA believes that the solution would be for the FRC to use its greater authority and endorse similar comprehensive guidance, rather than the partial solution which it currently proposes. A consultation process for such guidance would also enable the advisers of RMCs to provide their views, in order to accommodate the preferences of leaseholders as far as is possible. Legal and accounting terms need to be looked at together on this issue.

ACCA has consistently stated that the view of investors should be at the heart of standard-setting and financial policymaking. Too often their voice is not heard as rules are being made or proposals formulated.

But who exactly are the investors? How have their asset allocations and investment strategies changed since the Global Financial Crisis (GFC)? And, of most direct interest to accountants, what do they want from corporate reporting?
ACCA is undertaking a four-stage project examining the UK and Ireland investor landscape, post-GFC and the first two reports, based on interviews with key players and a survey of 300 investors carried out concurrently, reveal trends of far greater international application.

The increase in short-termism is one clear trend. The traditional domination of markets by pension funds and insurance companies has been eroded both by greater international ownership of companies, and by the emergence of other players such as hedge funds and private equity firms, with shorter-term investment horizons. And even the traditional players have switched much of their investment from equities to bonds, as a result of the GFC.

Added to this , the vastly increasing proportion (estimated by some to be 80%) of trades that takes place via computer in nano-seconds has left a question mark on who the owners of companies actually are – and how companies can meaningfully engage with investors who hold shares for a very short time. We have already seen international policymakers, such as the G20 and EU, responding with measures to enhance long-term finance and address the ‘ownership vacuum’. More is needed, it seems.

Low interest rates are another key trend. Central bank activism, leading to loose monetary policy, historically low interest rates and currency wars throughout Europe and the US has been a major response by the authorities to the GFC. This has had a clear effect on investors, making them search for yields in riskier investments.

Perhaps inevitably, the greater pressures on investors has seen a constant demand for more information and transparency -and the proliferation of new technologies such as mobile and social media has led to massively more corporate information being available, much of it on a real-time basis. But how much it is useful, and how do investors prevent themselves being overwhelmed?

Intriguingly our research revealed a dichotomy – and one which leaves policymakers with much to ponder. Three-quarters of investors say that, that the quarterly report remains a valuable input to their investment decision-making. Yet, at the same time, almost half of investors believe mandatory quarterly reporting should be abandoned, with almost two-thirds believing the increase in information has encouraged “hyper-investment” and taken up excessive amounts of management time.

This suggests a “tragedy of the commons” effect, whereby individual investors want to consume quarterly reporting for their own self-interest, despite recognizing that this focus on shortening time horizons is damaging for the overall market’s long-term interests.

Fully 45% said they had little use for the annual report – and worryingly, two-thirds said their faith in company reporting had declined since the GFC. Almost half that believe management has too much discretion in the financial numbers they report. While perhaps not surprising, these are nonetheless chastening findings for standard-setters and policy-makers to reflect on.

Is there any good news for the profession? Yes for auditors – much maligned of late – as external assurance of company figures seemed to be their main source of credibility. And investors claimed that they would be prepared to pay more to have additional information available contemporaneously as long as it was externally verified. This would put pressure on the audit profession – but it should consider it carefully as a way of regaining the initiative following recent critical political and regulatory inquiries on audit.

There is much here for many other parties to chew over, and ACCA will be following this up with a series of events designed to bring key players together to thrash it out, before releasing stages 3 and 4 in this research series, which will look at the ‘real-time’ issue in greater depth and investigate corporate reaction.

But for now, accounting standard-setters and regulators must consider the criticism of standards and the annual report. Policy- makers must wrestle with the quarterly reporting conundrum. And the investors themselves must consider how to get their voice more clearly heard when policy decisions that affect them are being made. If they really are prepared to pay more for a wider audit, then now would be a good time to let that be clearly known.

It’s now 20 years since the Cadbury Code was introduced. This is the code adopted by the Listing Authority and the London Stock Exchange to restore trust in the City and in financial reporting and ensure that scandals such as BCCI, Polly Peck and Maxwell could not happen again. It set out 19 best practice principles for corporate governance – few people had heard of the term then. Its provisions, in fewer than 600 words, covered the role and structure of the board, audit and reporting on the company’s position including going concern, board remuneration and internal control.

The Code has grown through the years as it went through several iterations. It is now administered by the FRC and called the UK Corporate Governance Code and its principles and provisions take up around 5,500 words, roughly ten times as many as the original code.

Has the Code done a good job? Most experts think it has. The UK has seen few corporate scandals in the last 20 years and many would say that is thanks to the code and they are probably right. But has governance helped create value? We have had the financial crisis and, for savers and investors, little growth in share prices for the last 10 years.

We have however seen the growth of an industry of governance specialists and advisors and we have seen the failure of several banks and, as a society, we bear the scars. ACCA says that the bank failures were governance failures. Others see things differently and in December 2010 the FSA concluded its first inquiry into the failure of RBS saying it did not find evidence of governance failure on the part of the board. This surprised many people. If a company fails surely that points to governance failure unless the reason for it was clearly not to do with the board. It is hard to think of how the failure of RBS was not to with the board unless we consider they were just victims of circumstances.

Is a board responsible for what goes on or a victim of it? Let’s consider Barclay’s role in fixing LIBOR? The Treasury Committee, in its inquiry this summer, heard that the FSA, in a recent review, had considered Barclay’s governance to be satisfactory. The official conducting the review was reported to have said Barclay’s governance was ‘best in class’. During the same period, others at the FSA were concerned about the culture of Barclay’s at the top. Lord Turner, the FSA Chairman, wrote to the then Barclay’s Chairman about what the FSA saw as behaviour at ‘the aggressive end of interpretation of the relevant rules and regulations’ and about the bank’s ‘tendency to seek advantage from complex structures or favourable regulatory interpretations’. Lawyers call this creative compliance and it sounds a little like Enron.

It illustrates the main problem today with both governance and regulation – there is more to compliance than compliance. The focus with both governance and regulation has been on compliance with provisions -in the case of governance, with the Code’s provisions, where the banks and other companies of course fully comply with the letter. It is much harder to tell if companies follow the spirit of the Code and it seems that essentially no one has been looking at how companies do this. The culture at the top of an organisation and the tone set by the board are crucial to whether or not there is good governance but it is very hard for outsiders to judge. Very few company governance reports convey a real sense of this although there is usually plenty of well-crafted text to tell us everything is just fine.

The FSA is changing its approach to regulation to one where supervisors are allowed to exercise judgement. This will make it easier for them to decide when the spirit of a code or regulation is being followed. It may be harder to get a board to respond appropriately. The Treasury Select Committee Chair interpreted Lord Turner’s letter to Barclay’s as a reading of the Riot Act. The Committee report however makes it clear that neither the CEO nor the Chair of Barclays seemed to get the message although Barclay’s board minutes recorded the seriousness of the matter as it recorded ‘Resolving this was critical to the future of the Group’. The Committee report says that judgement-led regulation will ‘require the regulator to be resolutely clear about its concerns to senior figures in systematically important firms’.

A judgement approach is needed for how everyone else looks at governance for companies – investors and their advisors, the media and regulators – and us. As we hear more and more stories about the tone at the top of organisations such as News Corp and the BBC, and about the minimal amounts of UK tax paid by UK household names such as Amazon and Starbucks, it behoves us all to look more closely at large organisations and how they are governed -not just whether they comply with the rules. We should be asking more questions of our leading corporations and holding them to account.